What is a Management Buy Out?

An MBO is the purchase of a company from the owner by its current management team. This is done by forming a new company (“Newco”) to acquire the shares of the existing company. The diagram below illustrates this:

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Funding for “Newco” can be provided by a mixture of:

The existing shareholders sell their shares to “Newco” and the transaction is complete. "Newco" will then repay its funders from the future profits of the existing company.

Why do they happen?

Management buy outs are usually brought about because an owner wishes to retire or because a parent company wants to sell a particular part of its business which it no longer sees as central to its future plans.

Selling to the existing managers is often considered a good way of securing the future of the operation and that of its staff because the existing management team are a known quantity and the current owner trusts them to look after the business.

The existing management team often have clear strategies of how to grow the company and to make significant personal wealth as part of the process.

Go to MBO Guide Page 2….key ingredients for success

or download the guide here

 

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